Standalone nonprofit children’s hospitals have largely rebuffed the pandemic’s financial disruptions and are in a better position to "weather expected and unexpected challenges” including high labor costs, according to a new Fitch Ratings report.
Among a sample of 23 organizations, children’s hospitals increased their median days cash on hand from 396.1 days in fiscal 2020 to 416 days in fiscal 2021, the agency’s analysts wrote. Median cash to debt rose from 249.1% to 323.5%, they wrote.
Although children’s hospitals’ median operating margin inched down to 3.6% from the prior year’s 3.8%, the analysts noted that 2021’s investment-fueled 17.1% median EBITDA margin represents the subsector’s highest since 2013.
Each of these liquidity and profitability metrics surpassed those reported in fiscal 2021 by a sample of 219 nonprofit hospitals and health systems, Fitch analysts wrote.
Days of cash on hand and cash to debt medians for adult provider organizations were 260.3 days and 185.5%, respectively, according to the report. Their median operating margin was 3%, while median EBITDA margin landed at 12.4%.
As specialized care facilities, many children’s hospitals are located in major population centers and often dominate their complex tertiary and quaternary care markets for young patients, Fitch analysts noted. They consistently enjoy strong philanthropic support and lean on academic affiliations to attract and retain in-demand physician specialists, they wrote.
“The higher median rating for children’s hospitals compared to adult providers demonstrates this subsector’s robust liquidity, solid operating profitability, unique market positions, strong philanthropic support and highly specialized clinical services,” Fitch analysts wrote in Tuesday’s report.
Fitch has raised red flags over the “more pronounced than expected” financial pressures faced by the broader nonprofit hospital sector. The ratings agency said in an August outlook report that it expects to issue more credit downgrades than upgrades to these facilities over the next several months.
But while children’s hospitals have broadly shown “significant financial flexibility,” Fitch analysts warned there are still some potential threats to their comfortable positions:
- Industrywide labor shortages will impact children’s hospitals and continue into 2023. However, “given the overall maintenance of full staffing levels [during the pandemic to date], more limited exposure of staff to coronavirus patients relative to adult providers and lower coronavirus surge related staffing needs, Fitch expects children's hospital profitability will be less impacted by the current clinical staff shortage in the healthcare industry compared to adult hospitals,” the ratings agency wrote.
- Children’s hospitals’ higher exposure to Medicaid as a potential vulnerability in the event of state or federal budget cuts. Of particular note, the Department of Health and Human Services expects 5.3 million children will be disenrolled from Medicaid with the end of the public health emergency.
- A return to in-person schooling and some experts’ concerns of a potential influenza/COVID-19 “twindemic” in the winter could lead to a higher burden of viral infections.
- New investments and care models will be needed to address behavioral health issues exacerbated by the pandemic.
Fitch expects to see a dip in children’s hospitals’ profitability over the coming year because of rising expenses and lagging revenue increases due to contract negotiation cycles. Yet “even with these pressures, Fitch’s 2022 medians show that the children's hospital sector's strong liquidity and profitability position the industry with significant financial flexibility to weather expected and unexpected challenges that are ahead,” analysts wrote.